Higher-than-expected US job creation; first steps towards repealing Obamacare; and a decline in China's PMIs

Macro Highlights
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10/05/2017

In the United States, unemployment declined to 4.4% in April, its lowest level in ten years. Hourly earnings decelerated to an annual rate of 2.5%. The House of Representatives voted to repeal Obamacare. Republicans now need the support of Democrats to get the bill through the Senate, which will likely lead to changes in the bill. China's PMIs have fallen in April, a sign that the economic cycle should have probably peaked. Brazil's economy has gradually improved, and India’s PMIs have shown that demonetisation had only a limited impact on its economy.

The April jobs report from the United States was encouraging. A total of 211,000 jobs were created, up from just 79,000 in March, and unemployment went from 4.5% to 4.4%, its lowest level since May 2007. Underemployment, which also includes those employed part time for economic reasons and job seekers who did not actively look for work over the previous four weeks, fell sharply in the first four months of the year, going from 9.4% in January to 8.6% in April. These statistics support our analysis that the labour market is maturing, with just two components lagging behind: the labour force participation rate and hourly earnings. The former fell back to 62.9%, reaffirming the 62.6% to 63.0% range it has moved in since the end of 2015. Annual earnings growth was revised down to 2.6% in March and then fell to 2.5% in April. When unemployment was at 4.4% in May 2007, hourly earnings were growing at a rate of 3.5%. At that time, however, underemployment had already been at around 8% for more than a year, putting greater pressure on earnings. Finally, inflation stood at 2.7% in May 2007, compared with 2.4% in March 2017.

The employment report should reassure the Federal Reserve as it tightens monetary policy. Unsurprisingly, the US central bank last week decided to keep the fed funds rate between 0.75% and 1.00%. While the Fed noted that growth had been weak in the first quarter, it considered this trend to be transitory and no cause for concern. However, the manufacturing PMI fell considerably, from 57.2 to 54.8 in April. Although the indicator still points to economic expansion, the reasons behind the decline are not very encouraging. It was the employment and new orders components of the PMI that fell sharply in April, with employment going from 58.9 in March to 52.0 in April and new orders from 64.5 to 57.5.

On 4 May, the House of Representatives passed a new healthcare bill – the American Health Care Act – meant to replace Obamacare. The bill had initially failed to get past the House on 24 March, but this time the White House managed to get the backing of ultra conservatives, such as the members of the Freedom Caucus, who had deemed the first proposal too moderate. The new act eliminates the obligation to take out health insurance and the tax penalties for people who go without insurance; it rolls back expansions of Medicaid,[1] which provides government-subsidised health insurance to the poorest households; and it introduces age-based tax credits rather than income-based credits. While the Congressional Budget Office has not yet estimated the impact of the new bill, it had approximated that the former version would leave a further 24 million people without healthcare by 2026. The chances of the Senate approving the bill in its current form are slim, given that some moderate Republicans have already come out against the bill and that it needs the support of 50 of the 52 Republican senators in order to get through. An alternative will most likely have to be drafted, which will postpone the bill further and could potentially stall any deal on the budget.

Several emerging markets recently published their PMIs (see right-hand chart, page 2). After picking up in the first quarter, China's official manufacturing PMI fell from 51.8 in March to 51.2 in April and its services PMI went from 55.1 to 54.0. While Chinese growth is on the right track and should be in line with the real GDP growth target of 6.5% for 2017, these figures indicate that the acceleration recorded at the start of the year is unlikely to continue. China's real GDP growth may therefore have peaked in the first quarter. Most components of the manufacturing PMI contracted. Input prices saw the sharpest fall, going from 59.3 to 51.8, an indication that China's producer price reflation may have topped out, as we wrote in our 24 April edition of Macro Highlights. Growth in the services sector also slowed, with some mixed trends: construction rose from 60.5 to 61.6, while other services fell from 54.2 to 52.6, underscoring just how important the housing sector is for China's economic expansion. This weaker growth is reflected in trade figures: growth in both exports and imports – particularly steel, copper and oil – slowed in April.

These developments reflect the paradigm shift put in place by the Chinese authorities in recent months, as the country has adopted a more cautious approach to financial risks rather than seeking to generate growth whatever the costs, which further exacerbates structural imbalances such as high debt levels and less productive investments. This new approach can be seen in the prudential measures taken to prevent the property market from overheating and in the tighter liquidity controls put in place on the interbank market in order to limit lending. And the latest PMI figures show this approach is working. The expected slowdown in growth reduces the People's Bank of China’s leeway to raise key rates. Since this monetary policy tool could destabilise the economy because of the country’s high debt levels, China’s central bank is unlikely to use it to calm the property market and limit growth in mortgage lending and shadow banking.

In Brazil, manufacturing PMIs came back to economic expansion territories. They stand at 50.1, their highest level since January 2015. Services PMIs have recorded a similar trend. These figures must be read with the sharp drop in inflation, which went from 9.0% in August 2016 to 4.6% in March, increasing consumers' purchasing power and confidence. This is one of the first encouraging signs that Brazil should, as we expect, come out of recession this year. However, real GDP growth is still only very gradually moving towards its potential level, which we estimate to be between 0.5% and 1%. Consumer and manufacturing confidence continues to be affected by how the tax reforms progress, particularly those concerning pensions, and therefore also by political developments in the country.

India confirmed that growth is holding up well, with PMIs remaining unchanged at 52.5. This indicator is back to where it was before demonetisation occurred in November 2016, which suggests that that initiative had little impact on formal economic activity. The PMI breakdown shows just how important domestic consumption is to growth.

[1] Under Obama's Affordable Care Act, Medicaid was expanded to include people whose income was 138% of the federal poverty level (i.e. USD 12,000 for a single person in 2017).